Tagged: Why not using TBF in the BRS ?
Anonymous11/17/2014 at 9:23 pmPost count: 3
I am now logged-in
It is official.
So, on the bond rotation strategy-or all others for that matter does your modeling anticipate any changes due to the latest Japanese recession (Nov 17, 2014)?
I currently love EDV but I have no desire to be “lost in love”
Frank GrossmannModerator11/18/2014 at 8:29 amPost count: 169
None of the strategies invests in the Japanese stock market. In the Global Market Rotation we have EPP which is the MSCI Pacific, but also this Index excludes Japan. In fact Japan is excluded in nearly all global indexes, because this market is too much manipulated by the influence of Japanese politics.
Michael CaveParticipant12/06/2014 at 2:41 pmPost count: 8
How do you expect this bond strategy to perform during a rising interest rate environment?
Ronald BriceParticipant02/13/2015 at 9:52 pmPost count: 8
Can you please clarify how this strategy is expected to perform in a rising interest rate environment? If you expect the strategy to produce positive returns, that could be anything greater than 0%. If the strategy is only going to produce 1% returns, then it would not be worth investing in the strategy while rates are rising.
Sorry, this question is for Frank’s reply below.
Alexander HornKeymaster02/14/2015 at 1:41 amPost count: 392
Ron, today had a discussion by email on the same topic and the ‘why’ of the recent dip in TLT/EDV/Bonds, maybe of help in addition to Frank’s reply.
Generally the market analysts seem to agree that the expected FED interest hikes are already properly priced into the Bond and Tsy instruments, at least to the ‘how much’ extend. Looking into the yield curves this seems understandable to me. What is happening right now is that the expectations of the ‘when’ these hikes are coming is moving the whole yield curve forward, last in early Feb with the FED statements. By my own logic – and assuming the ‘how much’ is priced in, this should then rather be a one-time movement, thus not affecting the further development this year. This might change by any next FED announcement, we’re really driven by the central banks right now, recall May 2013.
For yield curves see for example here: http://bondtutor.com/currentYC/currentYC.htm
Anonymous02/14/2015 at 12:07 pmPost count: 3
This is a reply to Alexander’s reply to #17223. Hope it shows up in the correct placement
I would like to add to Alexander’s reply, if I may. He is spot-on in his assessment of EDV. I have no Idea on anyone’s Financial situation other than my own. Given my disclaimer, I will say that everyone “expects” interest rates to increase (I am constantly nagging my husband about this whenever we go shopping). The key word is “expects” and I can tell you bluntly without hesitation (even before he dials up our IB brokerage account) that we have been 100% EDV since Jan 2014 and it has returned over 35%. So, even if it drops another 10%. I am OK with this- we also, have a standing sell order GTC in place to preserve capital. I will add that here in the states like most of the global markets it would be reckless and catastrophic to raise interest rates without strong economic incentive to do so. When? Not any time soon. So, when EDV drops to an acceptable MOS (margin of safety) for me, I will get more.
Oh- on bond rates of return, an acquaintance and financial Advisor has had all his fixed income clients in short term bonds for 4 years now “waiting for interest rates to go up” So, compare 1 yr EDV returns with 4 years of ~4% total return for short term bond funds and ask yourself; “What’s the risk.”
Don’t get me started on the newly released “Ultra-Short Bond ETF”
Now, when/if our economy gets it’s mojo back and if I live to see it, there are plenty of other Bond ETF’s to go into, perhaps 35%/yr may be a stretch-but do you need this every year? and if so, get in while it’s there. Equity ETF’s may also be an option if you are not comfortable with 100% Bond ETF’s
Hope this gives you some perspective and Cheers.
Ronald BriceParticipant02/14/2015 at 4:38 pmPost count: 8
Thank you, Anna.
(1) Are you 100% EDV as part of one of the LI strategies, or on your own?
(2) I’m not clear on how this strategy might perform in a rising rate environment. So that led me to think about Frank’s comment that this strategy should have a positive return in such an environment. A positive return is always wonderful, of course, but if that return is 1% (for example), then it almost becomes a question of why bother. In other words, I would have to turn to some equity component/strategy.
Anonymous02/14/2015 at 6:22 pmPost count: 3
In answer o your questions:
1). I am never alone and LI has some great strategies
2). Other than what has already been said, you will need to dust off that crystal ball and wait for the future to be told-Just like QE, etc.
Hope this helps Cheers
Frank GrossmannModerator12/06/2014 at 4:35 pmPost count: 169
The bond rotation strategy includes very different types of bonds. This goes from Treasuries (TLH) up to corporate bonds (CWB) which behave like stock market ETFs. So, I think that also in an environment of rising rates, this strategy should be able to produce positive returns.
Supal PatelParticipant01/02/2015 at 3:16 amPost count: 3
With recent changes in “Sleep well” strategy to use adaptive allocation and change the ETF selections, I feel like its same as Global Market Rotation strategy – Enhanced. Both are currently invested 50% stocks / 50% long term bonds. I currently invest in both these strategy to diversify and reduce the risk but with recent change I feel that diversification is no longer there.
Please let me know if I am wrong here or if I should switch to different strategy to diversify.
Frank GrossmannModerator01/02/2015 at 5:52 amPost count: 169
No, I think like this BRS and GMRS are much better hedged or diversified than before.
Before it was well possible that BRS and GMRS have been all invested in ETFs with a positive correlation to the stock market. Something like CWB, JNK + MDY.
Correlations between ETFs had no influence on the investment. Also when invested in a hihg volatile ETF like ILF, the overall allocation has not been modified.
Today GMRS would automatically adjust the treasury part to reduce the high ILF volatility, and the same happens for the BRS strategy.
Now you just have to add the treasuries together and buy only once (EDV= 1.5xTLT) and you are perfectly protected.
wigmoneyParticipant01/22/2015 at 7:53 pmPost count: 7
When you say by, “Now you just have to add the treasuries together and buy only once (EDV= 1.5xTLT) and you are perfectly protected.” Can you give me an example.. I just started using the Bond, Market and Sector strategies and also noticed the duplication of the bond hedge.. TLT/EDV.. So if I am using $35,000 for my EDV % in the Market Strategy then I need to by $52,500($35,000×1.5) of TLT for the same exposure?
Alexander HornKeymaster01/22/2015 at 9:33 pmPost count: 392
Yes, this is neither intuitive nor easy to calculate across different strategies. We thought about making an excel sheet available, but now rather opted to kick-off what we call our “gold version”, where the site will allow you to choose weightings by strategy and options like the EDV/TLT replacement and then do the math for you.. Will take some weeks, but hope this helps medium term…. OMG, another teaser we’ll have to deliver on :-)
But for the time being, here an example in excel. Look at the formulas on how to “rescale” the capital requirement. Keep in mind that we consider EDV like a ‘leveraged’ TLT, so you either need more capital, or rescale the overall position to maintain the “mix”. This ‘leveraged’ is technically not quite right, but it demonstrates the effect you’ll have when replacing EDV by TLT due to ther different duration and coupon.
wigmoneyParticipant01/22/2015 at 10:53 pmPost count: 7
Thanks Alex..might just leave as shown for each strategy and not combine..Not sure I want to commit extra capital or loose the leverage.. Only 1 or 2 more trades per month..
Really appreciate you showing the example…It made it a lot easier to see….
neosmileParticipant04/03/2015 at 9:13 pmPost count: 1
As a foreign investor I always have to be mindful of withholding taxes on dividends (ie., 30% for me). For the BRS, some of the choices like CWB or JNK would go ex div on the first day of the calendar month. And these ETFs do have very high divs. If I know a day ahead of ex div that last month’s choice is going away, then I can try to sell it out on the month end date (ie., before ex div) and take a leg risk into buying the new choice the following day. Is this possible? I know there is a possibility that things may change at the last moment but that’s alright.
Alexander HornKeymaster04/03/2015 at 9:26 pmPost count: 392
Simon, same thing for Frank, Vangelis and myself, and we’re looking into this also for our own account, and certainly there are other interested non-US investors. Selling off a day before exDiv might be an option, but the leg risk might eat your benefit away. Keep in mind that normally the allocation only changes gradually.. Might be worth a look in detail with a backtest, which we’ve not done.
We’re currently exploring futures, or ETF futures, but their price / signal behaviour is very different to the ETF because of rolls and other effects. So, we also have no clear answer to this… but keep exploring ourselves.
IlyaKipnisParticipant04/09/2015 at 12:25 amPost count: 2
Frank, Alex, comments from my blog post replicating/investigating this strategy:
Thanks for the post and nice job with the blog!
The missing piece is the tax rate applied to dividend. This seriously reduces the real amount available to investors. Worst case scenario is a foreign investor (like me) who has to pay a 30% tax on dividend: that changes dramatically the all picture. The rate applied to US resident is very different but it’s not nugatory either from memory.
The R Trader”
and this one (from Gerald M):
“I ran a bond rotation strategy for about 5 months last year. Being a foreign investor (like R Trader), it wasn’t worth it due to taxes. You are correct that dividends are a substantial portion of returns but if you have to pay significant taxes (or even regular taxes), the risk/reward changes – and not in a positive way! It would be interesting to try this on a quarterly basis using mutual funds. But as you have pointed out, the gap between closed and adjusted (not really achievable) is huge. I expect that to hold on a quarterly time frame.
Regarding those ratios, when using MF data back in the 90’s or pre 2007 for that matter, I think you should look at the risk free yields and not use RF=0%. From 1995 through to 2000, for example, 90 day yields were 5%. If you look at the return of these rotation strategies against a 5% RF yield, they will not look anywhere near as attractive. If you factor in inflation and then calculate the real returns, well, it gets worse. The 90 day monthly rates from 1934 are here: http://bit.ly/1IuEB9V
Finally, the post-2008 periods saw the Fed quadruple their balance sheet thereby lifting equity prices and bond yields got crushed at the same time (and of course the last 30 years saw the biggest bond bull ever on top of all that). So it was quite a distortion that was introduced in the markets (unprecedented in fact). You can see the effect of this intervention in your graphs above. There is a significant inflection point post 2008 (the same goes for the Universal Strategy). So the strategy is a curve fit because it is what worked well given the monetary policy. Walk-forward techniques don’t prevent curve fitting if the underlying strategy itself is a curve fit. It’s simply trying to optimize and already fitted algorithm. Going forward, I don’t expect interest rates to drop another 6% or more from here or for the Fed to quadruple their balance sheet again with QE5-8 thereby lifting prices through ten’s of billions of monthly purchases. CWB has a 60 day correlation of daily returns of 0.8 to the SP500. That’s very high so it’s like owning an equity index (although I haven’t tried it, I would not be at all surprised if you substitute SPY for CWB and get a similar result).
So basically, reality bites. Dividend taxes, inefficiencies in dividend reinvestment, trading fees, inflation, risk-free rates prior to 2007 and the curve-fit gains post 2008 makes me highly skeptical that this will actually yield any alpha going forward.”
Care to respond?
Alexander HornKeymaster04/19/2015 at 6:43 pmPost count: 392
same as most (all?) other sites, we do not include the tax effects into our backtests, so returns are gross tax. Main reason being that the individual tax rate varies very much depending on your location and account used. As example, just for an US investor the tax exposure between a savings account, and a deferred account like 401k, IRA or special purpose vehicle can cary from 0 to 30%, and this is not considering any tax-loss-harvesting.. For non-US investors it further depends on double tax treaties, home country regulation and whether you can claim witholding taxes from the ISR… So this is something each investor has to calculate by themselves, or with the help of a tax consultant..
Another point I’m missing in the comments above, is what scenarios you are comparing. Example: If you decide to invest in bonds, you are subject to capital gain and dividend taxes, automatically. In this scenario, you’re still better off using our bond rotation strategy compared to a buy&hold approach, simply because returns gross and after tax are better. The tax excempt US muni bonds might aleviate some of the tax burden, but this is again somehthing which only applies to a section of our followers.
If you are an international investor then indeed the dividend withholding tax might scare you away… same for buy&hold or our suggested approach..
Hope this clarifies, happy to continue the discussion
STEPHENMember05/06/2015 at 6:00 pmPost count: 22
I strongly suggest that this strategy be renamed from “Sleep Well” to something more accurate or simply “Bond Rotation.”
StevenParticipant06/15/2015 at 10:50 amPost count: 1
Hi, folks. I am a new member and this is my first post. I am enjoying the site very much, especially tinkering with the Custom Portfolio Builder. I just have a question related to the Bond Rotation Strategy, particularly to CWB.
When I compare CWB to SPY over the last several years, it appears to me as though CWB is about as volatile as SPY, but long term, CWB underperforms SPY. For example, back in the summer of 2011, when SPY dipped by about 20%, CWB did also. Then, by February of 2012, SPY had recovered to even, but CWB was still underwater by about 6%. My question is, why do so many of the strategies seem to stay in CWB so much of the time? Wouldn’t it be better to simply use SPY when it is trending upward? Or, if the desire is to have a lower volatility position than SPY, why not use something like SPLV?
Thanks in advance for any clarification, and keep up the good work with the site.
VangelisModerator06/15/2015 at 6:37 pmPost count: 162
Thanks for the suggestion.
To check, I just calculated the % Std deviation since CWB start vs same period SPY, and SPY has about 1/4 more volatility. Further, CWB reflects and captures a very different asset class that moves somewhat differently that the S&P 500.
I always urge subscribers to carefully consider and evaluate the underlying asset classes as one of the most critical steps when examining a strategy.
Michael ParzenParticipant09/26/2016 at 3:58 amPost count: 7
How sensitive is this strategy to the monthly rebalancing? that is, say i was super lazy and did 50/50 in the top two picks each month. would the returns and risk be absolutely different? i imagine for other strategies on here it would but curious about this one. thanks!
Michael ParzenParticipant01/01/2017 at 3:15 pmPost count: 7
hi-very interested in subscribing but….i found the following article which replicates the original strategy in R
the author goes on about the importance of dividends and the potential dangers of using yahoo’s adjusted data. he also says he was essentially able to replicate the SA results and it seems like a sound system..but warns about dividends on the etf’s used.
can someone smarter than me (so that means almost anyone) explain if his argument is valid and dividends are a concern? to me it seems they are simply reinvested so why does it matter?
Alexander HornKeymaster01/01/2017 at 8:33 pmPost count: 392
yes, Ilya of QuantStratTrader is a sharp guy and has replicated several of our strategies, mostly at least.
Dividends can be a concern due to their different taxation in the US if bond ETF are held outside a tax deferred account. This is especially true for the Bond Rotation Strategy, as dividends make a good chunk of the performance. This is NOT an issue if held in a tax deferred account (IRA, Roth, etc).
The second comment regarding dividend adjusted data from Yahoo is really less of a concern. What happens is that after a dividend distribution the past prices are adjusted to eliminate the price drop which follows any dividend payout. This adjustment can go back weeks, sometimes even months. The first trap some people fall in is that they do not consider this and do not “refresh the past” in their data when calculating signals. The second trap is that data is adjusted only some hours after the market close, this is the reason why we do our signals overnight and not right after the closing.
So yes, there are traps related to dividend adjusted data, but we feel we have addressed them in our calculations. Generally we do not think Yahoo price data to be less confident when working with monthly strategies as ours, but indeed some people do not share our opinion here.
Hope this answers, if not please let me know,
Michael ParzenParticipant01/13/2017 at 11:45 amPost count: 7
repost-this question was never answered last year- thanks.
How sensitive is this strategy to the monthly rebalancing? that is, say i was super lazy and did 50/50 in the top two picks each month. would the returns and risk be absolutely different? i imagine for other strategies on here it would but curious about this one. thanks!
VangelisModerator01/13/2017 at 2:02 pmPost count: 162
If you did 50/50 in the top two picks each month the returns and risk would be similar to the current BRS strategy (where current max/min allowed allocations are 60/40). The best way to try these scenarios for yourself and really see how the strategies work is to try QuantTrader.
trrParticipant04/29/2017 at 10:45 amPost count: 14
What’s your take on the debate on potential structural problems of high-yield bond ETFs such as JNK (and similarly, PCY and CWB, I assume) stemming from the illiquidity of the underlying holdings? Anyway, don’t these funds behave very much like corresponding equity funds watered down with appropriate amounts of cash? If so, why use them at all?
Alexander HornKeymaster06/21/2017 at 6:13 amPost count: 392
Sorry for the delayed response, somehow missed your question. We´re aware of the ongoing discussion regarding liquidity concerns in especially bond ETFs, where it seems the tail is whagging the dog, that is trading in the ETF surpasses the underlying instruments, thus potentially leading to pricing effects and concerns regarding liquidity in case of a market correction. Personally I´ve not been aware of the discussion you mention about high-yield bonds, but it seems related.
My take is that while such concerns might be reasonable and probably further increasing due to the ongoing rise in popularity of ETFs vs. underlying instruments and MF – what would be a valid alternative for passive investors? Investing directly into (high-yield) bonds of 30-50 companies, futures or more exotic and less liquid instruments? Completely staying away from (high-yield) bonds?
Following the discussion and being aware of the potential impact is important, but as long as there are no valid alternatives I´d not take an aggresive stance.
Not sure if this is what you´re looking for, happy to continue discussion,
trrParticipant06/21/2017 at 3:18 pmPost count: 14
BRS uses JNK and PCY, which I assume have high correlations to SPY and EEM, respectively. Instead, why not just use the equity funds, dampened with cash? That would probably avoid the potential liquidity problems (and also might be better tax-wise)? Is the point that JNK and PCY trend especially well, so as to be well-suited to rotation strategies? Do they meaningfully give exposure to risk factors not available through equities and treasuries? I am concerned that instead of providing a cushion in the event of a crisis, which substantially I look for a bond allocation to do, JNK, PCY and CWB could be the epicenter of a crisis.
Here’s another way of looking at it. What role does BRS have in a portfolio that couldn’t be replaced by some combination of equities and treasuries/AGG? For example, perhaps you could replace BRS with a blend of (the pre-December 2015 version of) GMRS and cash (or GOLD-USD, likely better).
Mike08/18/2017 at 5:09 amPost count: 0
feeling my way around the site and strategies – extremely comprehensive and thought provoking.
Quick question – in the returns reported for each of the strategies covered, are dividends included, or is performance calculated solely on the ETF opening vs closing price?
HowardParticipant10/01/2017 at 10:53 amPost count: 15
The BRS strategy has toggled its allocation between CWB-JNK and CWB-PCY over the past couple of months. Can you elaborate further on the driver behind the change? I know it is ultimately driven by the algorithm output, but do you think it’s detrimental to make the change? I am cautious of trading costs due to selling JNK to but PCY, and now after a month, I have to pay for the same trading costs to reverse the change. Please advise.
R D HATHCOCKParticipant10/13/2017 at 12:58 pmPost count: 18
I enjoy the LI model and have used it now for 18 months.
I use the BRS, G-C, MYRS, N100 and UIS 3X strategies (with a minimum of 10% allocated to each).
CWB has been a major holding for most of the time in BRS. I received a letter from the SPDR series trust stating that, as of 10/2/17, the benchmark index name was changed from “BLoomberg Barclays US Convertible Bond Fund >$500MM Index” to “Bloomberg Barclays US Convertible Liquid Bond Index”.
Will these changes effect how CWB operates?
Frank GrossmannModerator10/17/2017 at 6:17 amPost count: 169
I don’t think this will change anything. The step to define an index based on the fund is just marketing. Index data can be sold and others can build products based on this index. It shows however, that CWB is a very popular and liquid ETF which is in fact good for the Bond Rotation Strategy
Mark FaustParticipant10/28/2017 at 12:11 pmPost count: 41
Good Morning All,
With a lot of financial professionals thinking we are at the end of the “Bond Bull Market”, I was wondering where a good strategy might lie to keep the volatility in our portfolios at bay???
I have been using the BRS in the 20%-30% range, but I am afraid that going forward it might not be the vehicle it once was….
Michael PuchtlerParticipant10/31/2017 at 7:44 amPost count: 11
Hi guys – I’m a big fan of your service – been using it for over a year with great results and just recently upgraded to QuantTrader. So far so good!
Question for you – I use BRS as a dynamically allocated hedge in one of my custom strategies. I’ve been reflecting on what might cause that to not work out so well, and the assumed reverse correlation of stocks and bonds immediately comes to mind (namely, if we get a recession / crash of some sort that treasuries will go up). To mitigate this, I was thinking of incorporating some sort of ‘go to cash’ option, and noticed that you used to incorporate $SHY in the BRS but no longer do so. Do you mind sharing your perspective on a ‘go to cash’ option (knowing that $SHY isn’t actually cash) for the BRS, and why it was removed? I understand that the backtested performance might be better with the current 4 BRS ETFs, but the assumed reverse correlation mentioned above makes me a little nervous. Thanks!
Alexander HornKeymaster11/01/2017 at 9:50 pmPost count: 392
Michael, thanks for the flowers!
As long as the inverse correlation of the employed bonds to equities hold, it´s actually better to use them as hedge. Using cash means you take “skin-off-the-market”, so probably after a dip have already lost some in equities and will probably loose the re-entry.
Staying in bonds, you normally will off-set part of the dip – or even gain some money.The only way we still use a cash-component is to set a volatility constraint on portfolio level. You can test your own variants of cash as exit or as volatility constraint using QuantTrader, see here for a free month.
gmacgParticipant11/24/2017 at 11:14 amPost count: 1
Not strictly a bond strategy question but perhaps highly related … What would you recommend as an alternative to cash for funds set aside for emergency living expenses ? Cash returns essentially nothing in the USA but is stable-ish, so I am looking for something liquid that preserves the principal fairly well in good and bad markets and also generates a little yield. Thanks.
Alexander HornKeymaster11/29/2017 at 4:31 pmPost count: 392
Hmm, not an easy question if you’re referring to short term, e.g. <1yr. For current income probably going either dividend stocks (which is not really our main interest) or shorter bonds / munis (also not really our expertise).
We're rather medium/long term focused, so if your outlook is >1yr (with sufficient cash or income for expenses) then a broad and diversified portfolio of our strategies in my opinion is the best balance between capital growth and withdrawal rate.
rr6594Participant02/05/2018 at 12:07 pmPost count: 2
If I am not mistaken , most of the ETFs in the Bond Rotation Strategy mirror low credit rating /junk bonds.
What is the extent of risk due to this ? e.g. if there a spate of defaults in the JNK constituents, will the ETF tank ?
( May be a naive/basic question as I am not familiar with these ETFs) ..so that extent is it really a Sleep Well strategy !!
Also I read that the overall credit quality has gone down. Does this make this strategy more risky now than in the past ?
Miguel_DParticipant11/02/2018 at 5:35 amPost count: 1
I have been following the BRS strategy for some time and as some of its ETFs have a bearish outlook, I produced an excel spreadsheet including TBF (inverse ETF to TLT) in the rotation. Although my spreadsheet does not replicate the balancing algorithm and just allocates 50/50 to the two best performing ETFs with a lookback period of 90 days, it gives a very good yield curve. Of course this is a simplified model, but bringing TBF into the equation brings a very significant difference.
Is there any particular reason not to use TBF as one of the rotating ETFs?
Alexander HornKeymaster11/02/2018 at 9:27 amPost count: 392
Good morning Miguel,
here a Screenshot of the BRS strategy including TBF. Adding an outright short bond goes a bit against the philosophy of the strategy. Short bonds are long-term looser as the dividends from interests create a positive bias, again long-term, when the yield curve is expected to go up as currently then it may make sense.
You can see that there is no big difference in the performance anyhow, so we would rather not include it.
wesParticipant01/10/2015 at 2:06 pmPost count: 3
Frank you recently revised the bond portfolio with a new mix, deleting old and adding new ETFs.
Can we see what the results would be as the current reported results of the old strategy are now completely different and meaningless? Why do you even post them as it confuses the membership?
I find when such significant changes occur to a portfolio any real time credibility of current “Algo” design becomes worthless. This has to have a psychological impact on the investor sticking to the plan. When you see strategies such as the ‘permanent portfolio’ its allegiance and following is the fact that it does not change regardless of return.
Frank GrossmannModerator01/19/2015 at 2:14 amPost count: 169
I think it is absolutely necessary to review a strategy from time to time and do changes, if you can validate an improvement. The only thing which is fixed, are the monthly returns in the “return & investment tables” section. We would never update these to an improved backtest.
The only thing I would not change is the main characteristics of the bond strategy. This is, switching between a mix of negatively correlated bonds to maximize return and minimize volatility and drawdowns.
I even think the permanent portfolio is a good example to show why it is important to improve strategies. Sure you could just use the original PP buy and hold strategy with 25% GLD, 25% SPY, 25% TLT and 25% cash, but using a modern adaptive strategy with the same PP ETFs, you can get twice the return to risk ratio.
The new adaptive bond strategy has been very well backtested and compared with the old strategy and the result is very clear that we should switch to the new strategy. We will publish a complete paper on this soon.
So, all our strategies can change slightly over time, because the markets change, we get new ETFs or even only because also our team learns to use new ways to execute these strategies.
evan.peaseParticipant09/13/2016 at 2:30 pmPost count: 3
I know that your approach is very quantitate and data-driven (which I prefer as an investor). But, I’m genuinely concerned that bonds are no longer a reliable hedge due to monetary policies. Do you think this thesis holds water? If so, how will the strategies adapt?
If monetary policy is ever normalized (debatable), I’m sure the SPY/TLT correlation will come back down. I’m more concerned about what to do in the meantime.
Ivan FisherParticipant09/13/2016 at 9:49 pmPost count: 39
I would also like to echo this concern, however I come it it from a slightly different angle.
Here in Australia, our equities market is tiny compared to the USA and for the retail investor the workings of the bond market is largely not understood.
At best I think the average person here might know the rule of thumb which states that when yields drop, prices go up… that’s about it.
I don’t mind so much investing in instruments which I don’t entirely understand , as long as the backtesting looks plausible, which of course there is a long history of bond prices for the USA so this is no problem.
However , with the global interest rate environment at record low yields or even negative , in my mind we are in largely uncharted waters , so I also share concerns about the historic correlations between stock and bonds given the copious amounts of central bank activity in many countries.
Given this , would be nice to also see some strategies based upon different hedging mechanisms , such as inverse stock ETF’s and the like. I realise one problem with this is that many ETF’s haven’t been around sufficiently long to enable backtesting with confidence , unless some synthetic ones can be used. Or maybe strategies with some other market neutral abilities. I will leave it to the smarter ones to figure that out !
VangelisModerator09/14/2016 at 1:35 pmPost count: 162
Dear Evan & Ivan,
If you are worried you could increase your cash allocation or choose strategies that are less affected by a possible correlation break-down, possibly the BUG, GLD-USD, maybe the World Top 4.
That being said, near zero yields have been a concern since 2012. I remember reading an article back then about the ‘no-brainer’ opportunity of a lifetime: Short Treasuries. The market defies logic. Bonds continue to perform exceptionally well while holding their negative correlation to equities. The only exception was 2015. That year is a good and real example of what happens when nothing works (equities, bonds, gold and everything else fell). We did go through it, survived adapted and are continuing into a profitable 2016. If this or a similar scenario materializes again we will adapt again. We do have strategies that hedge with Gold (the BUG) as well as exposure to foreign markets, which in turn have exposure to commodities, that may be positively affected by rising rates. Gold is always a prime candidate for an alternative ‘safe heaven’ hedge to rising rates so it could become a useful additional hedge to us in the future.
Ivan FisherParticipant09/14/2016 at 8:15 pmPost count: 39
given my lack of knowledge about how bond pricing works ( I know there are many inputs into the various bond ETF pricing), is it fair to say that once interest rates start rising ( and they will at some point ) then “in general” bond ETF’s will start declining in price ? I’m hearing so many conflicting statements , seems nobody can agree on what they expect will happen
Alexander HornKeymaster01/01/2017 at 8:46 pmPost count: 392
pricing of bonds indeed is all a science, here a good compendium: http://www.investopedia.com/university/advancedbond/
What we´ve seen recently are two effects:
1) Increase in rates due to the (anticipated) Fed hike. This affected the whole curve, e.g. from short term to longer duration.
2) Increase in expected inflation due to Trump’s announcement of heavy public spending. This effects more the longer dated bonds, and is one of the reasons we moved to the new approach incorporaing TIPS (inflation protected) ETF.
Where will this go, especially if the FED indeed hike three times in 2017? There are manhy conflicting voices (lock 5 economists into a room and you get at least 10 opinions…)
-As the current 10 years yield is above or at least around the S&P500 dividend yield some people do not expect the 10ys yield to rise significantly.
– For Foreign buyers the US bonds are a paradise considering very low yields in Europe and Japan, so they are buying heavily, especially if current USD strenght should continue.
– If the Trumponomics due not work as expected (or only partially and delayed), inflation might my overestimated, so bond prices might fall.
– In case of any major trouble, bonds are still a reliable safe haven, e.g. in a crisis they will rise due to money flow.
With our broader bond strategy we feel to be fine in any outcome, but also our glassbowl is not big enough to make a call right now.
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